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Texas Craft Distillers Fight To Preserve A Valuable Tax Break

Thanks to a 2017 tax cut, small producers of whiskey and other spirits have invested in production and created jobs. But that tax cut expires on Dec. 31.

Barrels at Garrison Brothers Distillery, a craft bourbon whiskey distillery in the Texas Hill Country.

Fifteen years ago, there were three distilleries in Texas. Today there are 158. But craft distillers say they are facing a potential setback that could cripple their ability to grow. They want Congress to extend a temporary tax cut that has significantly cut their cost of doing business.

Making and selling whiskey means telling stories. That's Scooter Pearce's job at Garrison Brothers Distillery in Hye, Texas, just outside Fredericksburg. Smart distillers know that telling a good story is an important part of their business – from Texas-centric marketing on the bottle, to tours of the still house.

But lately, craft distillers like Garrison have been telling a different kind of story to a much different crowd: lawmakers in Washington. Texas distillers want Congress to extend a tax break that has become vital to their business.

Joanna Salinas is co-founder of Still Austin, a distillery that's been making whiskey at a South Austin office park for the last two-and-a-half years.

"If this tax reduction doesn't continue, we can expect an increase in our taxes of several hundred thousand. And for a startup business, [that] is a very vulnerable spot to be in," Salinas says.

She's talking about the lower tax rate craft distillers received as part of the Trump administration's 2017 tax package. Unless Congress acts, that tax rate expires next month. and will rise dramatically.

"For a company like ours, everything is about whiskey in barrels. So the money we saved in not having to pay those taxes went directly into producing more product," Salinas says.

Under the temporary tax rate, all distillers pay $2.80 in taxes per gallon on the first 100,000 proof gallons they remove from storage, in preparation for sale. A proof gallon is the amount of spirit, plus water, needed to reach the alcohol level the distiller wants the final product to have.

That's a lot more spirit than craft distillers bottle in a year. Next month, the tax they pay returns to $13.50 per gallon. Craft distillers say that puts them at a disadvantage. Larger, industrial distillers like Beam Suntory, the company behind the Jim Beam and Maker's Mark brands, bottles far more than 100,000 proof gallons each year, and can better shoulder that tax burden.

Mark Gillespie produces and hosts WhiskyCast, a podcast that covers the spirits industry.

"A company like Beam Suntory can pull 100,000 gallons out by the end of January," Gillespie says.

He says beer and wine producers have tiered taxing systems that actually help smaller producers. This recent push to get Congress to make the lower distillers' tax rate permanent has been going on for quite awhile.

"Distillers have been arguing for this for the last decade," Gillespie says. "Basically, distilled spirits is the one area where they did not have a tiered system that helped small producers, or gave them a break. The beer brewers had a tiered excise tax system so that smaller brewers didn't pay as much as the big guys did, and the same thing in the wine category."

Small distillers are backing a proposal called the Craft Beverage Modernization and Tax Reform Act, which would make the lower tax rate permanent. The bill currently has 323 House sponsors; 73 in the Senate.

"The problem is, it's been sitting in committee all year long, in both the House and the Senate. They want to attach it to a bill that has a good shot of passing, one of these must-pass bills like an appropriations bill or a budget resolution," Gillespie says.

Half of the 36-member Texas delegation in the House have signed on as co-sponsors, but U.S. Sens. John Cornyn and Ted Cruz aren't on the list. Their offices did not provide Texas Standard with their positions on the bill.

There are must-pass bills remaining on Congress's calendar this year, including a budget resolution that's needed to avoid a government shutdown. But Washington is also distracted by impeachment, and plenty of other beneficiaries of the 2017 tax reform want a shot at making their temporary tax breaks permanent.

So far, it looks like getting that commitment before time runs out on New Year's Eve might be a long shot.

This piece was originally published on the Texas Standard.

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